Arbor Realty Trust Inc

NYSE:ABR

Q2-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2025 Arbor Realty Trust Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would like to now turn the conference over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

[Paul Elenio, executive]

Thank you, Stephanie, and good morning, everyone. Welcome to the quarterly earnings of Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 30, 2025. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports.

Listeners are cautioned not to place undue reliance on forward-looking statements, which speak only as of today, Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

[Ivan Kaufman, executive]

Thank you, Paul, and thanks to everyone for joining on today's call. As you can see from this morning's press release, we have an active and productive quarter as we continue to make substantial improvements on the right side of our balance sheet significant progress in working through our delinquencies and REO assets despite the challenging environment.

We had a very active first half of the year with many significant accomplishments. We recently completed our first high-yield unsecured debt offering, raising $500 million of capital that we used to pay off all of our convertible debt and added $200 million of additional liquidity to fund the growth in our platform. This is a tremendous accomplishment, especially in this environment, we're very pleased to report that as part of this offering, we received a BB rating on our corporate credit from both Moody's and Fitch, reinforcing the quality of our platform and the value of our diversified business model.

Clearly, having access to this highly liquid market will allow us to further diversify our funding sources and push out and stagger our long-term debt maturities and continue to grow our platform and drive strong returns on our capital. This was a transformational deal for the franchise, capital of a string of significant capital market transactions totaling $2.5 billion that we successfully completed over the first half of this year. One of these significant transactions occurred earlier in the second quarter when we issued the first build-to-rent securitization in the industry, totaling $800 million with pricing that was well inside our warehousing lines, and contains enhanced leverage and a 3-year replenishment period which allows us to substitute collateral when loans pay off.

As I mentioned many times, we love the single-family rental business, and it provides us returns on our capital through construction, bridge and permanent agency execution, and this landmark transaction has now paved the way to building our securitization platform for this business. which will not only increase our leverage returns significantly but will also drive substantial efficiencies with our bank lines, now that there is a takeout to a CLO market. and building this type of securitization platform will allow us to scale up this business and gain market share as these efficiencies will further increase our competitive advantage in the space.

These transformational deals, these 2 combined with a [ 1.1 ] purchase facility, which we closed in the first half -- the first quarter with JPMorgan to redeem 2 of our CLOs tremendous examples of our ability to make substantial improvements to the right side of our balance sheet to drive higher returns on our capital. And given the strong securitization market and a highly constructive alignment we are currently seeing with other banks, we are confident we will continue to make meaningful progress in this area and create efficiencies that will help mitigate the drag from some of our interest-earning assets.

As discussed in our last few calls, the prolonged elevated rate environment has created a very challenging climate that is affecting the agency origination business and ability for bars to transition to fixed rate loans and recap their deals. We continue to see a tremendous amount of volatility and uncertainty in the market that has resulted in large wins in the 5- and 10-year indexes at times which we believe could continue in the short term, making it very difficult to predict where rates will go for the balance of the year. We will continue to monitor the market environment and the effect that we'll have business for the balance of 2025.

And again, as we've discussed in the past, if we see a meaningful sustained reduction in the 5- and 10-year interest rates, it will be a positive catalyst for our business by driving increased origination volumes and allow us to move more loans off our balance sheet, which will increase our earnings run rate and position us well for 2026. We continue to do an effective job of managing through our loan book despite the fact that we have been dealing with elevated rate environment over 3 years now. To date, we've had great success in getting borrowers to recap the deals and purchase interest rate caps as well as bringing new sponsor takeover assets, either essentially or through foreclosure. In the second quarter, we took back approximately $188 million of REO assets, $115 million of which we were able to flip to new sponsors and assume our debt. This brings our REO book to approximately $300 million as of June 30. We do expect to take back additional assets in the future, which net of dispositions we estimate will result in owning and operating approximately $400 million to $600 million in REO assets is slightly above our previous guidance of $400 million to $500 million. This is reflective of some of the recent trends we have seen this quarter.

Turning now to our second quarter performance. As Paul will discuss in more detail, our quarterly results were in line with our guidance with us producing distributable earnings of $0.30 per share. we anticipate that the balance of this year will continue to be challenging due to the significant drag on earnings from REO assets and delinquencies and the effect is prolonged higher interest rate environment has happened in our originations business, all of which will make 2025 a transitional year, which is reflected in our current dividend. And as we successfully resolved these assets, and if we start to see a sustained rate relief, we believe we were well positioned to grow our earnings and dividend again in 2026.

In our balance sheet lending platform, we are seeing an incredibly competitive landscape. There's a tremendous appetite for deals and a significant amount of capital out there chasing transactions. We are seeing shops consistently compromising on credit and structure, which is not something we will sacrifice to win a deal. As a result, we are being highly selective have closed about $100 million in the second quarter and $215 million in July, putting us around $700 million of volume for the first 7 months of the year. The guidance we gave at the beginning of the year of $1.5 billion to $2 billion of bridge loan production for 2025 was based on the current environment is something we still feel we can accomplish. It is highly competitive out there. And whether we come in on the low end or the high end of the range will be dependent upon the market conditions and the interest rate environment, which again has been volatile and unpredictable.

And again, the bridge lending business is very attractive to us as it generates strong level returns on our capital in the short term while continuing to build up a significant pipeline of future agency deals, which is critical to part of our strategy. And if we can continue to take advantage of the efficiencies in the securitization market with our commercial banks, we can drive higher level returns and increased returns on our capital substantially.

In the Agency business, we originated $850 million of loans in the second quarter and $1.5 billion for the first 6 months of the year. We have incredibly strong July originating an unprecedented $1 billion of agency loans, which includes a large deal that we have been working on for several months. We also have a very large pipeline, and we believe we could result in originating approximately $2 billion in the third quarter, which would be one of the single largest production quarters in our history. We are very fortunate to have such a resilient originations network with a very loyal bars, which allows us to capture some large off-market transactions despite an extremely challenging market. And these tremendous results will put us in a position to meet and possibly be our guidance for 2025 of between $3.5 billion and $4 billion of origination volume. We continue to do an excellent job in growing our single-family rental business. We had a strong second quarter with approximately $230 million in new business, and our pipeline remains strong.

This is a great business as it offers 3 turns on our capital through construction, bridge and permanent lending opportunities and generate strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams. We continue to have great success in executing our business plan, converting another $200 million of construction loans into new bridge loans this quarter and $335 million already for the first 6 months of the year.

And again, with the recent CLO we discussed, combined with enhanced efficiencies we are seeing in our bank lines, we are generating mid- to high returns on our capital which will contribute to increased future earnings, especially as we continue to scale up the business. We also continue to make great progress in our construction lending business, we believe this product is very important for our platform, and it also offers us return on our capital to construction bridge and permanent agency lending opportunities and generate mid- to high returns on equitable.

We closed $265 million of deals in the first 6 months and closed another $144 million in July. We also have a strong line with roughly $100 million on application and $400 million of additional applications outstanding and $500 million of deals we're currently screening. And given the strong progress, we feel we will easily beat the guidance we gave of $250 million to $500 million of production for 2025, and we are very ahead of schedule for the first 7 months of the year.

In summary, we had a very active and productive first half of the year with many notable accomplishments. We continue to execute our business plan very effectively and in line with objectives and guidance. Clearly, there has been a tremendous amount of volatility in this space, especially as it relates to our outlook for short-term and long-term rates. If the rate environment improves, it will have a positive effect on our business and outlook moving forward. Additionally, we have made great strides in improving the right side of our balance sheet through the securitization of public debt markets with our banking relationships that will continue to be a positive catalyst. As I mentioned earlier, we view 2025 as a transitional year in which we will work exceedingly hard to successfully resolve our REO assets and delinquencies providing a strong earnings foundation, which we can build upon in 2026.

I will now turn the call over to Paul to take you through the financial results.

[Paul Elenio, executive]

Okay. Thank you, Ivan. In the second quarter, we produced distributable earnings of [ $52.1 million ] or $0.25 per share and $62.5 million or $0.30 a share, excluding $10.5 million of onetime realized losses from the sale of 2 REO assets in the second quarter and the $0.30 a share of distributable earnings translated to a 10% ROE for the second quarter.

In the second quarter, we accrued an additional $10 million of net interest on paying accrual loans However, we only increased our -- receivable related to these loans by approximately $3 million during the quarter -- to some loans that either repaid in full or had much paydowns in which we received $7 million of back accrued interest that was outstanding on these loans. And in July, we also received accrued interest of around $7 million related to a bridge and mezzanine loan we had on our books on the same property that paid off in full. We had $187 million of loans on this asset, which we paid with $167 million agency loan that we recaptured an outside preferred equity that came in through the borrowing group.

This is a perfect example of a tremendous execution where we generated strong returns on our invested capital, we captured the agency loan with a much lower of our invested capital and back accrued interest. Our total delinquency came in at $529 million at June 30 compared to $654 million -- early first. These delinquencies are made up of 2 buckets loans that are greater than 60 days past due and loans that are less than 60 days past due that we're not quoting interest income on unless we believe the cash will be received. The 60-plus day delinquent loans or NPLs were approximately $472 million this quarter compared to $511 million last quarter due to approximately $62 million of loans at the base as REO $36 million of modifications and $21 million of payoffs during the quarter, which was partially offset by $79 million of additional defaults for the quarter.

The second bucket consisted of loans that are less 60 days past due came down to $57 million this quarter from $143 million last quarter due to $48 million in modifications and $48 million that we took back as REO, which was partially offset by approximately $10 million of new delinquencies during the quarter. And while we're making steady progress in resolving these delinquencies, we do anticipate that we will continue to experience some new delinquencies, especially if the current environment persists.

In accordance with our plan of resolving certain delinquent loans, we've continued to take back assets as REO, and we expect to take back more over the next few quarters, as Ivan mentioned. The process of foreclosing on and working to improve these assets and create more of a current income stream take time, which again will temporarily impact our earnings.

In the second quarter, we took back $188 million of REO assets, we've been highly successful in bringing in new sponsors in certain assets to take over the real estate and assume our debt. This strategy is a very effective tool at returning dead capital in a nonperforming loan into an interest-earning asset, which will increase our future earnings. We sold $115 million of these assets in the second quarter, and we're in the process of bringing in new sponsors of another $40 million of REO assets, which we hope to close by the end of the third quarter.

We recorded an additional $16 million of loan loss reserves on our balance sheet loan book in the second quarter, $6.5 million of which were specific reserves with the remaining [ $9.5 million ] being general CECL reserves as a result of changes in the outlook on real estate values from the outside service providers we use to assist us in determining our loss reserves. And again, we believe we've done a good job of putting the appropriate level of reserves on our assets, which is evident by the transaction we've been able to effectuate to date at or around our carrying values, net of reserves. In our agency business, we had a solid second quarter. And as Ivan mentioned, we are expected to have an exceptional third quarter as well. We produced $857 million in originations and $807 million in loan sales in the second quarter with very strong margins of 1.69%. We also recorded $10.9 million of mortgage servicing rights income related to $853 million of committed loans a quarter, representing an average MSR rate of around 1.28%.

Our fee-based services portfolio grew to approximately $33.8 billion at June 30, with a weighted average servicing fee of 37.4 basis points and an estimated remaining life of 6.5 years. This portfolio will continue to generate a predictable annuity of income going forward of around $6 million gross. In our balance sheet lending operation, our investment portfolio grew to $11.6 billion at June 30 from originations outpacing runoff for the second straight quarter. Our all-in yield on this portfolio was 7.86% at June 30 compared to 7.85% at March 31, and due to taking back nonperforming assets as REO, which are separately stated on our balance sheet, which was partially offset by some new delinquencies in the second quarter. The average balance in our core investments was $11.5 billion this quarter compared to $11.4 billion last quarter. The average yield of its decreased to 7.95% from 8.15% last quarter, mainly due to less back interest collected on our portfolio and some additional delinquencies in the second quarter.

Total debt on our core assets was approximately $9.6 billion at June 30. The all-in cost of debt was approximately 6.80% at 6/30 versus 6.82% at 3/31 and mainly due to slightly higher rates in our legacy CLOs from lower rate debt tranches being paid down runoff second quarter. The average balance on our debt facilities was approximately $9.5 billion for the second quarter compared to $9.4 billion in the first quarter, mainly due to funding our second quarter growth. The average cost of funds on our debt facilities was 6.7% in the second quarter compared to 6.89% for the first quarter excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet, and therefore, not included our total debt on core assets. The slight reduction in the average cost of funds was mostly due to the full benefit of lower rates from the new JPMorgan facility that we closed in the first quarter compared to the CLOs that we redeemed.

Our overall net interest spreads in our core assets was down to 1.08% this quarter from 1.26% last quarter, largely due to more back interest collected last quarter on delinquent loans, combined with a few new nonperforming loans in the second quarter. And our overall spot net interest spread were 0.9% at June 30 compared to 1.03% at March 31.

Lastly, and very significantly, we've managed to delever our business 25% during this very lengthy dislocation to a leverage ratio of 3:1 from a peak of around 4 to 1 nearly 3 years ago. And as Ivan mentioned, in early July, we issued our first unsecured rated debt deal, which will now provide us with a significant pocket of new institutional capital allowing us to transform our balance sheet and fund more of our business with unsecured long-term debt.

That completes the prepared remarks for this morning, and I'll now turn it over to the operator to take any questions you may have at this time. Stephanie?

[Operator]

[Operator Instructions]. Our first question will come from Steve Delaney with Citizens JMP.

[Steven Delaney, analyst]

First question, I guess, the drop in net interest income from $75 million in the first quarter to $69 million. Can you just explain what -- if there were any unusual items in there? Was it reversals when you took things into foreclosure, just any color there. And I apologize if I was trying to take good notes, but I probably -- you may have mentioned it and I didn't get it down.

[Paul Elenio, executive]

No, Steve, it's a great question. So yes, there's a couple of items. One, we had a few more delinquencies in the second quarter, as I mentioned in my commentary. We also had a little less back interest collected on previously delinquent loans. Obviously, as they move through the life cycle and become further and further delinquent, and we're lining it up to take them out as REO or reposition them. The chances of getting back interest gets smaller and smaller as we're taking those assets back. So that had a little bit of an impact.

But to your point, and as I mentioned in my commentary, we had recorded net new paying accruals of about $10 million for the quarter. It would have been about $15 million, but we reversed $5 million of paying accrual and $3 million of that were on loans that we foreclosed on, one of which we flipped that loss this quarter that we mentioned in our commentary. So we do spend time every quarter looking at the performance of our assets and depending on where things are with a particular property in particular sponsor, we may make decisions to reverse certain again this quarter to the $2 million to $5 million, and that's really what's driving that difference.

[Steven Delaney, analyst]

And it sounds like you're being very proactive trying to move 5 rated loans into REO, so you control the situation. $365 million now at more than double $176 million at the year end of 2024. Paul, do you have some idea of just where that might peak out? And how high could that figure go over the next 2 quarters before it starts rolling down. And I know you're moving some off as you did this quarter. where should we expect the peak?

[Ivan Kaufman, executive]

Yes. So Steve, let me give you a macro outlook in terms of how we're approaching it. as I said in my commentary, we're viewing 2025 a transitional year. So we want to try and sell this process as much as we can. And all of this behind us as much as possible behind us. Clearly, nonperforming loans is a bit of a drag.

We've seen a little bit of a recent phenomenon, and we've expanded our potential REO by about $100 million. And it's a little bit of a different outlook. A lot of our REO that we have, we've mentioned are 12 to 24 months hold. We're seeing loans that are reasonable occupancies well above $80 million, like in the $85 million area where the sponsors are based of capital. And we feel without them putting in additional capital to continue with the unit turns and keep the assets up or by rate caps, we're making decisions now that we're better off facilitating the disposition of those assets and bringing in new sponsors.

So as a result, there will be on our books for a shorter period of time as we go through those 4 closures, maybe 90 to 120 days does not have much to do with those assets. So there'll be a little bit of a drag and we may bubble off a little bit more in REO, but it's a lot lighter touch and we're doing it at or about where these assets are marked on our balance sheet. And also when we do that, as I previously mentioned, we ended up with a lot of recourse liability to see spots which we feel will create additional income in future what takes time back. So we've adjusted our philosophy of being a lot more aggressive looking at this year as a transitional year and really taking to reposition more aggressively.

[Operator]

We'll move next to Jade Rahmani with KBW.

[Jade Rahmani, analyst]

We've seen your comments and a pickup in theory capital markets activity with lenders across the board being much more active, including the GSEs and multifamily still remains in favor, broadly speaking. So the question is if this is translating into Arbor's portfolio, the increased interest from outside parties in the REO book. in the sub-performing loan book and also an uptick in repayment activities. Just if you could comment on that, that would be great.

[Ivan Kaufman, executive]

So clearly, that has a lot to do with the perception of where interest rates are. And as you can see, rates are moving down, every time rates move up, it creates an opportunity to people get at the fixed rates. There is a tremendous amount of dollars chasing distressed. And then when we do have a deal that's in the distress, we have multiple bidders and it's a very, very competitive landscape -- but as rates move down, all of that, as I said in my commentary will be in our favor. Even as small move like today of over the last maybe 7 days of a 20 basis point drop in the 5-year, I could tell you, we're converting a couple of hundred million dollars off our balance sheet today and tomorrow, just with that move. So that will accelerate a transition for people and an attraction of capital. And without a question, multifamily, the asset class has always been a great asset class. There's been a dislocation, but we feel it's extraordinarily resilient. We're seeing a lot of money into this space.

[Jade Rahmani, analyst]

I was also wondering if you think that there is an opportunity for Arbor to own key assets within the portfolio, if you've identified any assets that seem attractive because we know there's a shortage of affordable housing in the market, and the outlook probably will improve for this asset class post the current period of elevated delinquency and nonperformance.

[Ivan Kaufman, executive]

Yes. We're not afraid. Historically, we've done a great job of taking back assets doing extraordinarily well on them on our balance sheet. And then if the appropriate time selling them. So clearly, it's within our philosophy and capability to do that. So when we do take back these REOs, we feel we can improve them, manage them and get great execution. So I think giving guidance to $400 million to $600 million of assets owned when we get to a certain level, we make a decision whether it's optimum to sell it. But we do believe in workforce housing. We think that a lot of these assets have been capital starved and under managed and bringing the right management and the right amount of capital to reposition them is not only a good opportunity to get full realization on our debt, but hopefully do better than that as well.

[Jade Rahmani, analyst]

And on the GSE side, could you comment on credit trends within that portfolio? We can see the delinquencies pick up?

[Ivan Kaufman, executive]

Yes. I think across the board in the agencies, you've seen a level of increase in delinquencies. I think we're at the bottom of the cycle. And I think that every time you're at this bottom of the side, you'll see them peak. I've met with the agencies, I've been with them. They've taken about a record number of REOs relative to the last several quarters, they feel they're peaking as well. But I think borrowers are at that peak stress point, and they're running out of capital. So I think you're in this period of time where you've seen a bit of a peak. We think that will continue through the next couple of quarters. And clearly, what happens with interest rates has a major impact on that as rates go down people find a way to sell their assets or attract new capital. But we definitely are in the peak of it. And I think the next 2 quarters will reflect a little bit of what's happened in the last quarter, but we think we're at the bottom.

[Operator]

Thank you. We'll move next to Rick Shane with JPMorgan.

[Richard Shane, analyst]

Okay. So you realized $10.5 million of losses related to REO this quarter. It sounds like 1 property basically, you foreclosed on or took delinquency and sold right away. The other one, perhaps more seasoned. Is that the way to look at this?

[Paul Elenio, executive]

Yes. So Rick, I'll let Ivan give the details on the 1 property. But yes, there was a an asset that we took back right away as soon as it went delinquent. It went delinquent in the quarter, we took it back right away and flipped it to a quality sponsor and took a loss from where we had it marked. We had it marked at about $4 million loss. We ended up taking about a $9.5 million loss. So a little deeper than our reserve, and Ivan can talk to why we did that.

The other asset we took back during the quarter as well, but we had it marked pretty much right on top of the value we flipped it, I think, for a $1 million loss from where we had it marked. So the one was deeper. The other one was pretty much right on top. But I can't give the details on the 1 asset at the $10 million loss.

[Ivan Kaufman, executive]

We just made a decision on that particular asset that if we didn't get our management and the asset could suffer significantly, management, it was stopping to put capital in payables were accruing the asset eventually. So we just thought it would be best to foreclose on it, settle out with the sponsors and moving into capable hands. That asset has been moving to capable hands on interest-earning asset on our balance sheet will improve occupancies up. And we think we made the right decision. It was in the market where there was a lot of competition for tenants. And we thought the existing management group was not capable of continuing to maintain the value and we felt we were at risk of potential a deterioration of value. So that was our decision that, that period of time to move that asset out.

[Richard Shane, analyst]

Totally makes sense. And I also very much appreciate the transparency about the -- where you were where you sold it versus where your marks were. Can we talk a little bit about given the increasing contribution from PIC the amount of crude interest on the balance sheet. I'm assuming that, that's being capitalized in the loan balances, but want to make sure and if we can just get some numbers around that to understand how that's building over time, that would be really helpful.

[Paul Elenio, executive]

Sure, Rick. Absolutely. So we're sitting at June 30 with $95 million of PIK on our balance sheet as a receivable. $15 million of that pick is related to mezz and PE, most of which is that number this quarter, but we elected to take back as we go forward, but we are adding that to the carry value of the loan. And then we continue to value those loans every quarter when we do CECL. And if the value is underrated we're writing it down. So that's been our procedure. That's something we'll continue to do. And that's the way we're approaching it.

[Richard Shane, analyst]

Got it. And then last question for me. Ivan, you discussed tactically some of the decisions related to REO this quarter and, hey, these were 2 best loss type properties. You now have almost $4 million of REO as Jay pointed out, we're kind of reaching probably the cyclical peak in terms of deliveries of multifamily. Can you talk a little about the absorption of vacancy on the properties where you're seeing strength, where you're seeing weakness and how that's dictating your strat about what you're going to quickly versus what you're willing to hold to potentially enhance value.

[Ivan Kaufman, executive]

Sure. First, the absorption issue that most people talk about is on Class A deliveries and some of the major metropolitan areas where there's been an oversupply in a bigger way. We don't really have much concentration in that area. That doesn't affect us, but that's how people really look at it, whether you go to areas like Austin or Nashville or Atlanta, where there was tremendous Class A deliveries in Charlotte, that really doesn't affect our portfolio. What we really have is a lot of workforce housing in certain areas where you have some operators who operate inefficiently. You have a lot of cover overhang and economic occupancy issues that exist previous calls -- was as high as 12%.

So we're seeing tremendous growth on the REO book that we have in terms of occupancies. Our initial REOs that we took back, they're very neglected properties, very poorly run properties. And those are all being repositioned, and you'll see steady, steady growth in occupancy. I think the occupancy will grow our REO book was probably in the mid-30% and increase at about [ 10 ] points a month. the more of taking back, which is why we want to be aggressive. We're looking at occupancies in the low to mid-90. And we went back because the sponsors are not going to manage the unit turns, increase occupancy and improve that property. So we think that will be very short term in duration. We think that we'll take them back and very quickly, some simultaneously, some maybe 30, 60, 90 and 120 days. The absorption will be fine on those. It will be normal improvements. We'll get those back up to the high 80s, low 90s. And once they're at that level, if the market is right, then we'll look at this.

So that's kind of my overall outlook. But the absorption doesn't materially affect us. That's more Class A. You do have certain areas like San Antonio and Houston. We have a lot of migraine issues. You had a lot of economic occupancy issues due to the migrant issues, that's turning over. That's a transition market, and we think that will show constant improvement in occupancy and have all the right trends.

[Richard Shane, analyst]

And I apologize, I am going to ask one last follow-up on that. Hopefully, it's a quick answer. Given the size of the portfolio and your description of repositioning some of it and optimizing it, what type of capital expenditure should we expect on the portfolio over the next 6 to 12 months?

[Paul Elenio, executive]

Yes. So it's a good question. I've got to get some numbers and maybe Ivan can help, but there's 2 categories, right? There's the more heavy lifting assets that we're owning and operating that need some reposition need some capital in the lighter touch stuff that Ivan has been talking about recently. I don't know if I and you have in your head what you think we would invest in the assets we have on our balance sheet right now to get them repositioned.

[Ivan Kaufman, executive]

Yes. We'll get back to you. We do have a budget on that. They've all been forecasted and budgeting. The more recent stuff we're talking about is very nominal.

[Paul Elenio, executive]

It's not a huge amount of money. I mean guessing right now, I think it's probably on everything, $25 million to $50 million.

[Ivan Kaufman, executive]

That'll be a high number and we said we'll get back to you, yes.

[Operator]

We'll move next to Crispin Love with Piper Sandler.

[Crispin Love, analyst]

First on agency originations. The increase materially, but Freddie has been lower in recent quarters. Can you discuss some of the dynamics there? And then also just what the key drivers of the very strong July were despite up rates being relatively?

[Ivan Kaufman, executive]

So first of all, it's good to have 2 agencies that compete with each other and sometimes 1 more competitor than the other. And sometimes, 1 provides quicker service and in all the areas. We've traditionally done a lot more -- we've done Freddie Freddie has been really stepping up our relationship recently and sometimes they're more aggressive on certain loan types, in particular, some of the bigger loans. So we're pleased to be able to have both agencies and do a really good job on it.

We've been working on some really significant transactions throughout here and as Paul mentioned, July was probably the biggest month we've been a long time closing $1 billion. They represented a couple of marquee big transactions with some of our spots were very loyal to us. So we've done a good job. Our pipeline remains extremely strong, and we're very bullish in our numbers for the third quarter, which will put us back on track to meet or exceed what our projections are.

We're looking today at a drop in the 5 years, as I mentioned, within an hour this morning, we already had about $200 million worth of loans that are going to convert off our balance sheet just from that drop. So if the rate environment continues to drop, we should continue to increase originations above our full forecast. But right now, we're looking at a pretty good third quarter.

[Crispin Love, analyst]

Great. And then also in the quarter, you had a big pickup in SFR originations. How do you think about the longer-term strategy of SFR versus Bridge multifamily for Arbor?

[Ivan Kaufman, executive]

So the SFR market is growing dramatically, and there's been a lot of -- even in this location, a lot of capital put into that space. doing the construction lending part of that requires a real level of expertise that a lot of people don't have. And if we're able to provide the whole gamut of services for those borrowers, meaning construction bridge and permanent. We're in a great competitive advantage. I'm the COO, it gives us the ability to really expand out how much we do. We were always concerned with being too reliant on commercial banks without having that outlet. Once we did that securitization, we really stepped up our appetite and we'd like to increase and be a little more dominant. So we were a little cautious having too much concentration without having a CLO origination capability and nonrecourse nonmark-to-market lancing. Now that we have that, we can be a little bit more aggressive. And our returns have been exceptional. So we're going to put a big effort to continue to build our market share in that space.

[Crispin Love, analyst]

Great. And then just one last one for me. Can you share your thoughts on the net interest income trajectory over the near term in the current environment and kind of where you might expect it to bottom?

[Paul Elenio, executive]

Yes, good question, Crispin. It's a tough one to answer. We are seeing, as Ivan said, we are seeing a challenging environment that we expect to continue for the third and fourth quarter. Obviously, if rates move down, that will certainly help but we are expecting it to the bottom out here over the next quarter or 2. A couple of things that could offset it to the positive, though, are things we've talked about in our commentary. One is all the efficiencies we've been getting on the right side of our balance sheet is certainly helping some of that drag. And we're also seeing growth in the portfolio. As you mentioned, our SFR business building. We're doing a nice job of converting construction with the bridge loans, which is helping. We're also still growing, even though it's very competitive, the balance sheet book. So I think that growth will help offset a little bit of that drag. But we do expect it to bottom out here over the next quarter or 2, given what we're seeing in the market.

[Operator]

We do have a follow-up question from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

I'm curious if you might be interested in launching a fund to put some of the REO and nonperforming assets into rate capital around bifurcate the portfolio, create a fee stream and also create some participation in the upside in those assets and allow the company to invest and add value there. Is that something you might consider?

[Ivan Kaufman, executive]

A few people have approached us on it. We're going to have to evaluate how much it can be transitional, how much we're going to end up with and whether we have a core big enough to do that. So it is something that management has been discussing. But I think it's probably a little bit premature. We want to see where interest rates go over the next month or so. because of interest rates drop, I think that will be a real stimulus to move those assets out more quickly, but we will evaluate that option.

[Jade Rahmani, analyst]

And then just on the agency business, there's quite a lot of noise with what the Trump administration might do, whether they try to take the GSEs public I guess, number one, is that affecting the business at all in terms of the plan to originate new bridge loans and eventually get a GSE takeout. So that's just number one. And number two, one of your peers of mortgage REIT made an acquisition. They acquired another license and pretty good valuation, would you be interested in potentially JVing with other firms that are interested in the agency business?

[Ivan Kaufman, executive]

Listen, we're always would like to increase our agency business originations and whether we come up with them directly or indirectly if there are other firms who want an affiliation to access our agency originations from their bridge lending, we're happy to do it. But I think that the landscape is going to change a little bit. We've talked in the past about how we've been the only effective lender to be able to do balance sheet lending and agency lending. We now have somebody else trying to replicate that years to perfect that. It's a thing to do. So we'll see how effective they are. I wish him luck process. It takes a long time to create the right culture, and we continue to be very effective at it. but we do everything we can to increase our partnerships with people who can contribute to our agency originations.

[Jade Rahmani, analyst]

Thanks very much.

[Operator]

This does conclude our question-and-answer session for today. I'd like to return the call back to Mr. Ivan for any closing or additional remarks.

[Ivan Kaufman, executive]

All right. Thank you, everybody for your participation and support. Have a great week and enjoy the rest of the summer.

[Operator]

Thank you. Ladies and gentlemen, this does concludes presentation. You may now disconnect.